Emerging market debt as equities hold steady; two Russian corporates set guidance

By Reshmi Basu and Paul Deckelman

New York, April 25 - Emerging market debt moved higher Tuesday, bolstered by the U.S. stock market's ability to hold steady after its recent strong gains.

In the primary market, two Russian commercial banks announced talk for upcoming deals.

JSCB Bank of Moscow set price guidance for a dollar-denominated offering of 10-year lower tier II subordinated notes (Baa1/BBB-) in the area of five-year mid-swaps plus 190 basis points

The notes will be non-callable for five years.

Investor presentations are scheduled to end on Wednesday, making stops in Dubai and London. Deutsche Bank and JP Morgan are joint bookrunners for the Regulation S issue of loan participation notes, which will be sold via special purpose vehicle Kuznetski Capital SA.

Also Transcapitalbank (B1) set price guidance for its inaugural offering of dollar-denominated three-year senior unsecured eurobonds at 9¼% to 9½%.

ABN Amro and Deutsche Bank are joint bookrunners for the Regulation S transaction.

The roadshow is scheduled to end on Wednesday.

Adding to the pipeline, Indonesian integrated energy group and coal producer PT Indika Inti Energi plans to sell a $250 million offering of five-year bullet bonds.

Investor presentations will start in Hong Kong on Wednesday, move to Singapore on Thursday and will wrap up in London on Friday.

Proceeds from the sale will be used for refinancing, to fund expansion and energy production projects, for working capital and for general corporate purposes.

JP Morgan and ING are lead managers for the Regulation S deal, which will be issued via Indo Integrated Energy BV.

From Argentina, commercial center developer Alto Palermo SA plans to sell a two-part offering of up to $120 million in senior unsecured notes due 2017 and up to $50 million of argentine peso-linked notes due 2012 (/raAA-/AA-(arg)).

Citigroup and Standard Bank are lead managers for the Securities and Exchange Commission-registered offering.

Secondary firm

Back to secondary trading, emerging market debt edged higher in cautious trade Tuesday as U.S. stocks stayed firm at their recent peak. With the market clocking in record tights, investors are wary of adding risk ahead of upcoming U.S. economic data, according to a source.

Furthermore, another market source noted that the market felt heavy, particularly in Asian credits.

Venezuela up on Merrill Lynch

Venezuelan bonds were seen trading better on Tuesday, given a boost by a positive recommendation from international investment giant Merrill Lynch & Co., which said that high world oil price - crude is now at $66 per barrel and rising - would support the country's economy and underpin the value of its bonds.

The country's most widely traded issue, the dollar-denominated 9¼% notes due 2027, were seen up 0.75 on the day, closing at 122.75, their highest level in a week, while the bonds' yield tightened by 6 bps to 7.15%.

The Merrill Lynch report also downplayed previous market concerns that that investors would switch out of the sovereigns to buy the new bonds issued by the country's state-run oil company, Petroleos de Venezuela SA.

Regionally speaking, the Merrill Lynch analysts recommended that investors lighten their positions in Colombian bonds, which have recently had a solid run-up on expectations that the Bogota government would continue buying back debt. That helped to push average spreads on Colombian bonds versus U.S. Treasuries by about 4 bps to 135 bps.

The Merrill Lynch report also recommended that investors overweight Turkish debt and cut their Philippine sovereign holdings (see related story elsewhere in this issue). Turkey's 8% dollar bonds due 2034 were quoted up nearly ¾ point at 111.44, helped by the recommendation and by an easing of concerns that the upcoming election of a new president by the parliament will produce political turmoil.

Ecuador's constitutional crisis

EM market players were meantime watching the news from Ecuador, to see whether the latest constitutional crisis in the volatile Andean nation would have any impact on the country's bonds, which have been the strongest emerging debt performer this year, up over 26%.

At the same time, they noted the government's reassuring pledge to continue paying its debts.

Ecuador's Congress, now controlled by forces friendly to president Rafael Correa, voted Tuesday to fire the nine members of the Constitutional Tribunal - the country's supreme court - after that court voted on Monday to reinstate 50 of the 57 legislators who had been removed from office several weeks ago by a lower court, which ruled at the time that those Congress members had wrongfully tried to block the president's plans for a referendum on convening a national assembly to rewrite Ecuador's constitution.

Correa denounced Monday's court ruling as "a shameful deal," and after the constitutional court had handed down its ruling, hundreds of pro-Correa protestors surged through the streets of Quito, the capital, and briefly stormed the court building, demanding that the judges reverse their ruling. They pelted the jurists with fruits, vegetables and other debris, forcing the judges to leave the building under police guard.

Correa, a left-wing populist elected president last fall, says the rewrite of the constitution by the national assembly that he is seeking is needed to once and for all break the power of entrenched elites, whom he claims act against the interest of the Ecuadorian people and contribute to the nation's climate of political instability, which has seen three other elected presidents deposed in the last 10 years.

Correa's critics charge that the campaign is an attempt by the president to grab more power for himself and to subvert traditional institutions. At this point, the general public sides with Correa, with 82% of those voting in a referendum earlier this month backing his proposed national assembly.

On Tuesday morning, police surrounded the Congress building and prevented the officially reinstated lawmakers from reclaiming their seats, deepening the constitutional confrontation. The replacement lawmakers who took their positions after they were fired by the lower court are not likely to step aside for them now, particularly since this would return control of Congress to Correa's opponents.

The vote by the Correa-controlled legislature to sack the judges sets Ecuador asail in uncharted waters, since the mechanics of how it might be enforced and whether the remaining opposition lawmakers might challenge its legality are unknown.

The latest political turmoil comes against a backdrop of strong gains for Ecuador's dollar-denominated foreign debt, with the benchmark 10% notes due 2030 now quoted in the low to mid 90s, up from their all-time lows around 67 seen in December during the weeks after Correa's election in response to the adversarial tone of his remarks and those of his incoming economy minister, Ricardo Patino, concerning the debt. The two politicians called the more than $11 billion of foreign debt incurred by predecessor governments "corrupt" and "illegitimate" and strongly hinted they might repudiate at least part of it, or force a highly unfavorable settlement on the bondholders - perhaps as much as a 60% haircut.

But after languishing near those lows for a few weeks, Ecuador's bonds began moving back up in late January and early February, when the country surprised some observers by making the scheduled $135 million Feb. 15 coupon interest payment - this after giving off signals that it might skip the coupon and put the money into social welfare spending.

The rebound was also aided by Patino reaching out to investors and softening his earlier, more aggressive tone, as he said the government wanted to work with the bondholders on a "friendly" restructuring rather than a confrontational crackdown.

Patino sought to further reassure the financial markets on Tuesday, declaring that Ecuador will continue to pay its foreign debt while the government has the resources. He added that the government is still formulating its plan to restructure those obligations.

Merrill Lynch emerging debt analyst Pablo Goldberg, however, said that neither the latest political problems, nor Patino's attempts to mollify investors, "is really news to the market." He said that the minister "has been saying that they'll pay if they have cash available for a while, and this political process has been going for a month or so, already, with Congress firing the courts and the courts dismissing Congress - blah, blah, blah."

He said that "the market in general has learned to live with a large degree of political activity in Ecuador, and as long as appetite for risk remains and oil prices remain high [Ecuador is a net oil exporter], appetite for Ecuador sovereign bonds will continue."

While he saw Ecuador's bonds down a little, with its benchmark 10% notes due 2030 at 94.40 and its 2015 bonds at 101.25, he said that was more a function of oil prices being about $1.30 less than they had been two days ago, and some switching out of Ecuador's bonds and into Venezuela's.

Indian local bonds firmer

In Asian dealings, India's government bonds were seen firmer after the central bank - while promising to contain inflation - left key interest rates unchanged, in line with prior market speculation that the bank would not have to push rates up to keep inflation down.

That investor belief that a rate boost was not necessary had caused yields on the 10-year rupee-denominated bonds, the country's benchmark issue, to fall to their lowest levels this month over several sessions in the run up to Tuesday's Reserve Bank of India meeting.

The 8.07% bonds due 2017 were quoted up 0.76 to 100.52, while the yield tightened 11 bps to 7.99%.

The central bank indicated that it continues to regard containment of inflation as a top priority, but chose to leave rates where they were, to rely instead on liquidity management through currency market activity.

The bank projects a near-term 5% inflation target and an eventual target level for inflation of as low as 4% to 4.5% - less than its previous projection of a 5% target rate.

In other country-specific news, the Philippines posted losses on the unexpected resignation of national treasurer Omar Cruz ahead of mid-term elections.

During the session, the Philippines bonds due 2025 lost 0.13 to 142.93 bid, 143.37 offered.

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